The decade-old use of offshore business process outsourcing (BPO) in mortgage lending continues to evolve along with lending, economic and political cycles. For example, a weak loan origination market is causing some lenders to reassess the attractiveness and potential scope of further structural cost reduction through BPO and other means. Increased risk-management costs and rising compliance costs are also driving growth in lenders' information technology (IT) spending for BPO.
The primary strategic cost-reduction alternatives that lenders use are core systems replacement, business process re-engineering and BPO.
These three strategies are connected; for example, lenders may need to re-architect their lending platforms to more closely synchronize and monitor outsourced tasks with internally completed tasks. This column assesses two emerging trends: 1) the hybrid offshore/onshore delivery model and 2) platform-based BPO.
A new approach: The hybrid offshore/ onshore BPO delivery model
The lending market challenges that began in 2007 forced vendors to reconsider what types of BPO work they would do and where they would do it. The traditional approach of outsourcing work to low-cost areas offshore excluded many discrete tasks and subprocesses that lenders would not or could not allow to be performed offshore. To make these tasks eligible for BPO and increase the size of the addressable market for BPO services, many vendors have created or purchased onshore lending BPO delivery centers.
Vendors that once resisted onshore BPO because it increased their cost base and cut into profit margins now see it as a means to increase their addressable market and deepen client relationships.
TowerGroup believes that the offshore/onshore BPO model will keep growing. Continued federal regulation, the need for local market knowledge and political imperatives will drive increased demand for onshore BPO operations.
BPO vendors will need to blend their offshore operating cost model with an onshore model in low-cost regions of each client's country to serve clients while meeting their own shareholder growth demands.
A new technology architecture approach: The platform BPO model
An increasing number of vendors are leveraging their IT platforms to become BPO providers and create a platform-based BPO delivery model for lenders willing to outsource virtually their entire lending operation. This combined ITO/BPO or "platform BPO" strategy can increase both lender cost...